Why gift stock to a child?
While giving the gift of stock is not usually the first idea that comes to mind when holiday shopping, it may be worth a second thought this season. Although untraditional, stock has the potential to be the gift that keeps on giving, especially if it’s given to a young child.
Long-term growth:
Many adults give stock to a child because the longer a stock is held, the higher the likelihood it grows in value. Therefore, the stock can be sold for a substantial gain when the child is older and in greater need of money. The gift of stock early in life can fuel larger purchases or savings later in life, such as a house or a retirement plan.
Educational value:
On the other hand, some people are more interested in gifting stock for its educational value. Gifting stock can be a great way to get a child interested in the stock market at an early age.
How to gift stock to a child?
There are several ways to buy stock for another person:
- Transfer shares: You can transfer shares from your brokerage account to the recipient’s brokerage account.
- Physical stock transfer: You can physically transfer the stock in certificate form, though this method is less common today.
- Buy in recipients name: You can buy the stock directly in the recipients name.
Setting up a custodial account:
If you want to gift stock to a child, set up a custodial account. A custodial account is an investment account you can create in a child’s name. Any money or stock deposited into a custodial account belongs to the child, but as long as the child is a minor, you would manage and invest any funds within it. Therefore, once the child is of age (usually 18 or 21), the child can use the money in any way they wish, without regard for the original owner’s intentions.
That being said, while you have control of the custodial account, it can be used as a great educational tool to show children the value of investing. Early interest and care in investing may provide the child with insight into how to handle the money within the custodial account when they are of age.
Related read: Gifting stocks: The guide to giving stocks as presents
Tax implications for gifting stocks to a child in 2024-25
Gifting stocks to a child can be an effective way to transfer wealth and teach financial responsibility. However, its important to understand the tax implications that come with such gifts in the 2024-25 tax year.
1. Annual gift tax exclusion
For the 2024 tax year, the annual gift tax exclusion has increased to $18,000 per recipient. This means you can gift stocks valued up to this amount to your child without incurring any gift tax. If you are married, both you and your spouse can gift a total of $36,000 to each child without triggering the gift tax.
Example: If you gift your child shares worth $15,000, you are within the exclusion limit and wont owe any gift tax. However, if you gift shares worth $25,000, you will need to file a gift tax return for the $7,000 exceeding the exclusion limit.
2. Gift tax and lifetime exemption
If your total gifts exceed the annual exclusion, you may need to utilize your lifetime gift tax exemption, which is $12.92 million for 2024. This exemption allows you to gift larger amounts without incurring immediate tax liability, but you must report gifts that exceed the annual exclusion.
3. Capital gains tax
When gifting stocks, the recipient (your child) assumes your cost basis in the shares. This means if you bought the stocks for $10,000 and they are worth 1$5,000 at the time of the gift, your child will inherit a cost basis of $10,000. If they sell the stocks later for $20,000, they will owe capital gains tax on the $10,000 gain.
Example: If your child sells the gifted stocks for $20,000, they will pay capital gains tax on the $10,000 profit, which is the difference between the selling price and the original cost basis.
4. Considerations for minors
If your child is a minor, the stocks will typically be held in a custodial account until they reach the age of majority. Earnings from the stocks may be subject to the “kiddie tax,” which taxes unearned income over $2,300 at the parent’s tax rate. This means that if your child earns dividends or capital gains from the gifted stocks, those earnings may be taxed at your higher tax rate rather than your child’s lower rate.
Read More About Capital gains tax implications.
The long-term impact of gifting stock to a child
Although it’s not often on a child’s birthday or holiday list, giving the gift of stock to a child has many upsides. Over the child’s lifetime, the stock has the potential to grow considerably in value. The stock gifted to a child at a young age may be used to buy a first home or kick start a retirement fund later in life.
In addition, investing on behalf of a child can be a great teaching moment. Encouraging interest in investing and the stock market early in life can help teach a child the power and value of being fiscally responsible. When investing on behalf of a minor, it may be smart to set up a custodial account, where you can control investment decisions until the child is of age.
Talk to a financial advisor about your options if you are interested in giving the gift of stock to a child this holiday season.
